Ask a person owning a flat and paying huge housing loan installments, what are his savings and investments. Most of them would answer it to be the house itself. It is a common misconception that your residential house (or a home) is an asset and the money being paid as installments is investment.

A home is a definitely a emotionally valuable possession. But we should also realize that it is not a real asset. All our possessions or assets can be classified into two categories. One is ‘Income generating assets’ and ‘Non- income generating assets’.

For any person it is also important to have real income generating asset. From this perspective your assets like bike, gold jewels, home (your primary residential house) are not income- generating assets unless you have bought them to sell when they fetch higher value. Any amount of increase in value of your house is going to be only notional and you can realize it only when you sell it, which again is a rarity.

Income generating assets are those which generate passive income for you. Passive income is an income earned without much of an effort from your side. Returns from investment in debt, equity, real estate, commodities, rent from a house, etc are examples of passive income.

So, it is important for everyone to invest reasonable portion of your earnings in real income generating assets. This will be your first step towards ‘Financial Independence’. (Financial independence is ability to continuously sustain all your expenses from your passive income.)

Harvard professor Greg Mankiw put up this parable on his blog recently. Apparently, the author of this sarcastic take on the American tax system is unknown but it has been circulating in academic circles for some years now. Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing. The fifth would pay $1. The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The ninth would pay $18. The tenth man (the richest) would pay $59. So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realised that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings). The sixth now paid $2 instead of $3 (33%savings). The seventh now pay $5 instead of $7 (28%savings). The eighth now paid $9 instead of $12 (25% savings). The ninth now paid $14 instead of $18 (22% savings). The tenth now paid $49 instead of $59 (16% savings). Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!” “That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

AkshayaTritiya is around the corner and traditionally it is considered an auspicious day to accumulate wealth like gold (assumed anything purchased that day will multiply). But why not consider the gold mutual funds option this year.

Why gold mutual fund?

You will spend on locker charges to safeguard the gold ornaments but you needn't spend even a penny to safeguard your investment in the fund. The craze for the new jewellery will remain only for some time, then it becomes old-fashioned. It is never so with the fund. You may think the value of your gold has increased over a period...but it is always going to be a notional gain and not a real gain.because most of us will never sell gold. (Even if you happen to sell your old jewellery, you will not opt for cash. Rather you will exchange it for a new design) It’s easy to sell the mutual fund units, without any sentiment attached to it.. So, buy gold the mutual fund way this akshayatritiya (or any day for that matter) and watch your money really grow (No more notional profits ).

Many of us start investing randomly in NFOs or we start investing in sectoral , thematic funds or invest as per broker's advice. understanding the risk / return and investment philosophy of each fund is essential before we start investing in equity mutual funds.

It is very important to understand the nature of funds and follow a proper approach towards investing in Equity MF ( Equity MF Investment Approach)

1. You can start investing in well diversified large cap funds like HDFC Equity , Reliance vision, Franklin Prima Plus , HDFC Top 200 ,etc. These can constitute a major portion of your portfolio.

3. You can add further spice by entering into sectoral funds..but unlike the diversified equity funds, these funds perform well only during business cycles favourable to that sector. So try to minimize exposure unless you are adventurous.

Those who seek extreme safety should always stick to well diversified equity funds and keep invested for a reasonable time frame.

It is not required that one needs to invest in all the good funds available. one needs to be choosy and limit the number of funds too.

Normally in the January to March of every year , most of us ( the salaried class esp..) try to look into the year's tax plans. We run around making investments in a hurry to save taxes and collect other proofs for submission to their employers. That Shouldn't be the case ideally.

April is the right time to plan your taxes for the year ahead. So, what you should do now?

1. Understand the latest tax laws that are relevant to you and your source .(Tax Related Tips )

2. Plan for making your investments. you can spread across investments in PPF, NSC, ELSS , etc throughout the year to avoid last minute cash outs. This is the right time to plan for your SIPs if you intend to invest in ELSS.Once you plan for your taxes, make necessary declarations with your employer and keep that updated whenever there is a change in your tax plan.

3. Calculate provisional tax liability and see to that you don't have surprises when you receive your pay check

4. If you have flexible component option in your salary..this is the time to plan you salary structure prudently as to minimize taxes on your income.

5. Have all the documents like your House Rent bill ( for HRA), SIP Statements filed regularly every month so that you need not run for them when its time for submitting your proof.

NEWS-"Reliance Mutual Fund has reduced the SIP amount for Monthly as well as for Quarterly Frequency. From 1st April 2007, one can start Monthly SIP with a minimum amount of Rs.100 and Quarterly SIP with minimum of Rs.500 only"

This announcement from Reliance is a first big step in bringing masses to MF investment. Now all you need is just Rs. 100 / - ( less than your cable, electricity or any other bill !!!!) p.m to participate in MFs( own multiple businesses by the way , if you invest in equity funds).

Lot of other fund houses may follow suit. A good first step in taking the equity markets to the bottom of the pyramid.

If you have been averse of trying your money in equity , you can take the 100. pm route now!!!

Interest rates have slowly moved northward . This has started affecting the stock markets. Real estate , Bank and Auto are be the sectors that may take a major beating on their growth. As far as the consumer is concerned, its a good thing for people who are having to cash to invest in fixed instruments . Return on FDs and debt instruments may go up again further due to the liquidity crunch.Floating rate home loan borrowers will be the worst affected with these hikes. No one bothers about the long term economic impacts when settling for a floating rate loan. They tend to suffer a lot during these cycles. we can expect a major crash in real estate prices if this trend continues.(and a lot of NPAs for the banks too)

Since the inflation is high .Limit yourself to 'Vital and Essential' spending, try to invest your extra money in FDs, Stick on to your SIPs( there is no need to panic for the long term investors). Borrowers can try to part pay their loans , if possible and escape the wrath of higher interest rate .